The relationship between corporate diversification and corporate social performance

Does diversification affect firm response to stakeholder demands and social issues? Despite extensive interest in corporate diversification in the strategy literature, the relationship between diversification and corporate social performance (CSP) remains largely unexplored. In this study, I propose that the level of diversification will be positively related to the CSP of firms. However, when diversified firms have a strong focus on short‐term profit, it may discourage firm response to stakeholder demands and investment in social issues, thereby negatively moderating the positive relationship between the level of diversification and CSP. Empirical testing on a sample of U.S. firms generally supports my predictions. Copyright © 2012 John Wiley & Sons, Ltd.     

The contingent value of CEO political connections: A study on IPO performance in China

This study investigates the effect of corporate political connections on IPO performance in an emerging economy. More specifically, it examines how CEO political connections affect the IPO performance of 428 firms in China from 2000 to 2004. The empirical results show that CEO political connections have a positive impact on firms’ ability to raise capital from public markets. The results also show that CEO political connections with the central government play a more important role in IPO performance than political connections with regional governments. In addition, the positive effect of central political connections on IPO performance is weaker in market-restricted regions but stronger in highly regulated industries. The findings highlight the contingent value of CEO political connections in an emerging economy.     

Technological diversity,related diversification,and firm performance

Previous findings that related diversification creates value have been called into question over concerns about methodology and measures. Reviewing existing theory to consider how a firm's knowledge base interacts with its product market activity, I address several of these concerns by creating a measure of technological diversity based on citation‐weighted patents. The measure indicates a firm's opportunity for corporate diversification based on economies of scope in valuable knowledge assets, is defined for both single‐ and multibusiness firms, and is not correlated with more fundamental aspects of diversification, such as the number of businesses in the corporate portfolio. Evidence from a large sample of firms shows the positive relationship between diversification based on technological diversity and market‐based measures of performance, controlling for R&D intensity and capital intensity as further indicators of the type of assets underlying diversification. Results hold when controlling for the endogeneity of diversification and performance in a cross‐sectional sample or when controlling for unobserved factors using panel data. Copyright © 2006 John Wiley & Sons, Ltd.     

Diversification strategy,profit performance and the entropy measure

Several industrial organization studies, using diversification index measures, examined corporate diversification and economic performance and failed to find any significant relationship between them. Rumelt and other strategy researchers used a semisubjective classification scheme and uncovered a systematic relationship between diversification strategies and performance. This study combines the strengths of the index approach, namely, simplicity, objectivity and replicability, with the essential richness of Rumelt's methodology. Using the Jacquemin-Berry entropy measure of diversification and the line-of-business data, this study finds that firms with predominantly related diversification show significantly better profit growth than firms with predominantly unrelated diversification.     

The relationship between portfolio diversification and firm value: The evidence from corporate venture capital activity

Corporate venture capital (CVC) activity exposes firms to new technologies and markets. An important but as yet unexplored question is the relationship of the industry diversification profile of the portfolio of venture companies to corporate value creation. Insights from options and diversification perspectives support our hypothesis that diversification of a corporate investor's portfolio of venture companies is related to corporate wealth creation in a U‐shaped relationship. We also propose that a corporate investor's financial constraints moderate the relationship between the diversification profile of its CVC portfolio and value creation. When we tested our hypotheses using a sample of CVC investments across multiple industries, we found support for them, and these findings may inform the CVC activities of corporate investors. Copyright © 2013 John Wiley & Sons, Ltd.     

Within‐business diversification in technology‐intensive industries

This study extends diversification research to a new level of analysis, examining how within‐business diversification, which occurs when firms extend existing product lines or expand into new ones, affects organizational survival. While prior research suggests that corporate‐level diversification accounts for relatively little variation in performance, within‐business diversification matters a great deal, by influencing which start‐ups survive and which firms better cope with rapid environmental change. Specifically, we find that the relationship between within‐business diversity and survival is contingent on the amount of environmental change wrought by a firm's competitors as they simultaneously diversify their own product portfolios and innovate technologically. Analysis of the population of U.S. personal computer manufacturers from the industry's founding in 1975 through 1994 supports our premise: Regardless of its effects across businesses, diversification matters a great deal within them. Copyright © 2004 John Wiley & Sons, Ltd.     

Are collective political actions and private political actions substitutes or complements? Empirical evidence from China's private sector

This paper examines the circumstances under which collective and private corporate political actions are more likely to be substitutes or complements. Using data based on a series of nationwide surveys conducted on privately owned firms in China, I find that firms that are engaged in collective political actions are more likely to pursue private political actions. This positive relationship is stronger in less economically developed provinces and when there are greater opportunities for the state to redistribute economic resources in product and capital markets. Meanwhile, this relationship is weaker in the presence of heavier regulatory burdens and for firms in which the state has some equity or owned by individuals who had prior political careers. These findings contribute to the corporate political action literature. Copyright © 2013 John Wiley & Sons, Ltd.     

Linking corporate strategy to capital structure: diversification strategy,type and source of financing

This study examines the relationship between corporate strategy and capital structure, specifically the diversfication and financing strategies of a firm. The results show that equity financing is preferred for related diversification and unrelated diversification is associated with debt financing. Additionally, firms diversifying through acquisitions are more likely to use public sources of financing and those emphasizing internal development of new businesses depend primarily on private sources of financing. Using simultaneous equation estimation, we found a reciprocal relationship between a firm's financial strategy and its corporate diversification strategy. Mode and nature of diversification are also reciprocally interrelated. © 1998 John Wiley & Sons, Ltd.     

Corporate diversity and economic performance: The impact of market specialization

This papers introduces a market-based typology of corporate strategy, which builds on previous typologies (Rumelt 1974, 1982). We argue that, because different markets require different skills for success, firms which concentrate in one market area (consumer or industrial), at given levels of diversification, should achieve superior performance. Empirical tests with a sample of manufacturing firms support this proposed relationship between diversification strategy and financial performance.     

The contingent effects of political strategies on firm performance: A political network perspective

Research Summary: We examine the performance impact of corporate political strategies by analyzing the relationships among firms and various government institutions. While a firm's political connections to a focal government with decision‐making authority enhance performance, connections to a rival government competing with the focal government harm performance, particularly when the rivalry is intense. Firms can neutralize the negative effect from this political rivalry by using direct or indirect connections to a constraining government with power over the focal government. We find support for our conjectures based on an analysis of interactions among Chinese steel firms and the central and provincial governments in acquisition decisions during the industry's consolidation period of 1999–2010. Managerial Summary: Firms invest in political capital in order to influence public policies in their favor. However, the government is a not a monolithic entity and the relationships among various government institutions can alter and even reverse the effects of a firm's political strategy. This research shows that a firm's political connections can be both an asset and a liability. That is, although firms benefit from their connections to governments with decision‐making authority, they can be caught in the crossfire when there is a rivalry between governments. Furthermore, our research suggests that firms can cope with the negative impact from political rivalry by taking advantage of the structural relationships within the political system and influencing governments that have constraining power.     

Multinationals' diversification and the risk-return trade-off

This paper advances a theoretical rationale to explain Bowman's paradox (1980) that firms with high returns can have low risk. Here we draw on the rich body of international management research and argue that global market diversification, which provides firms with three distinct options and opportunities over domestic firms, can explain the high return-low risk profile. We also argue that no strong theoretical rationale exists in support of either related or unrelated product diversification generating such a favorable risk-return profile. By integrating both the product and the global market dimension of diversification into our analyses and by controlling for the industry effect, this paper sheds new light on the relationship between corporate diversification and the risk-return tradeoff. The results of this research, which are based on the diversification experiences of 125 multinationals, reveal the strikingly important, though so far overlooked, role that global market diversification plays in the joint management of corporate risk and return. Global market diversification here reflects both the multiplicity of international market areas in which a firm operates and the distribution pattern of a firm's industries across these multiple areas.     

独立董事的政治关联与公司绩效

以2006年～2007年间我国A股上市公司为研究对象,实证检验了我国上市公司中独立董事的政治关联是否具有业绩后果。研究发现,独立董事政治关联程度与企业以托宾Q值度量的业绩存在显著的正相关关系,该正相关关系在第一大股东为国有股的上市公司中表现尤为明显。该结果表明,我国上市公司独立董事的政治关联是一种有利于增加企业价值和提升企业业绩的至关重要的政治资源,对于第一大股东为国有股的上市公司,该政治资源的业绩后果更明显。     

The relationship between product and international diversification: The role of experience

We establish prior diversification experience as a key determinant of the relationship between growth of product and international diversification. Prior diversification experience allows firms to overcome short‐run constraints on simultaneous diversification growth imposed by the difficulty to transfer tacit knowledge, ambiguous competencies, and limited absorptive capacity. Studying U.S. and European firms, we find a positive relationship between growth in product and international scope for firms with high and a negative one for those with little prior diversification experience. Further, we find that product diversification experience has greater impact than international diversification experience. Copyright © 2014 John Wiley & Sons, Ltd.     

Diversification, Concentration and Economic Performance: Korean Business Groups

The purpose of this paper is to analyze empirically some of therelationships involving corporate diversification, concentration and economic performance for agroup of 25 of the largest Korean chaebols or business groups over the period 1985–1995. UsingHerfindahl–Hirschman indices of inter-industry diversification and intra-group member firm concentration,our results indicate that increased conglomerate diversification does not affect chaebol profitswhereas changes in internal member firm concentration do. Of particular interest with respect to bothdiversification and concentration are our findings that a quadratic relationship exists between groupprofits and the number of member firms, with both smaller and larger chaebols having higher profitsthan intermediate size chaebols. A similar relationship also exists with respect to group size measuredin terms of total assets. Since the number of member firms is included as an explanatory variable, ourresults imply that profitable chaebols expand primarily within their existing industries ratherthan by adding firms in new markets.     

Opportunity costs,industry dynamics,and corporate diversification: Evidence from the cardiovascular medical device industry, 1976–2004

This paper examines how demand conditions across alternative markets impact diversification decisions and firm performance by influencing the opportunity costs of deploying non‐scale free capabilities. Using data within the cardiovascular medical device industry, this study shows that: (1) firms with a larger stock of pre‐entry innovation experience are more likely to diversify; (2) firms in a current market with greater relative demand maturity are more likely to diversify; (3) diversification is associated with a performance decrease in the current market; and (4) diversification is associated with a performance increase at the corporate level. These findings shed new light on the self‐selection process of corporate scope, the conceptualization of firm capabilities, and the connection between industry dynamics and resource deployment. Copyright © 2013 John Wiley & Sons, Ltd.     

Does experience imply learning?

Research summary : Research traditionally uses experiential learning arguments to explain the existence of a positive relationship between repetition of an activity and performance. We propose an additional interpretation of this relationship in the context of discrete corporate development activities. We argue that firms choose to repeat successful activities, thereby accumulating high experience with them. Data on 437 aircraft projects introduced through three governance modes show that the positive performance effect of the firm's experience with the focal mode becomes insignificant after accounting for experience endogeneity. We suggest that in a general case, experience with corporate development activities may be tinged with both learning and selection effects. Therefore, omitting to account for experience endogeneity may lead to incorrect conclusions from an “empirically observed” positive experience–performance relationship. Managerial summary : This paper emphasizes that firms generally choose to undertake the corporate development activities (new product introductions, diversification moves, international expansions, alliances, acquisitions, etc.) with which they have been the most successful in the past and that they expect to be the most successful in the future. Hence, if a firm possesses certain capabilities, it will repeatedly engage in certain activities corresponding to those capabilities, thereby simultaneously achieving high levels of activity experience as well as superior activity performance. This view suggests that an “empirically observed” positive experience–performance relationship may not be due solely to learning‐based enhanced capabilities but may also be driven by astute self‐selection. Overall, we provide a new interpretation of the relationship between experience and performance in the context of infrequent, heterogeneous, and causally‐ambiguous corporate development activities. Copyright © 2015 John Wiley & Sons, Ltd.     

Effects of intra- and inter-regional geographic diversification and product diversification on export performance: Evidence from the Chilean fresh fruit export sector

This study examines individually the effects of intra- and inter-regional geographic diversification on the export performance of firms from the Chilean fresh fruit sector. It also explores the direct effect of related product diversification on export performance and its role as a moderator in the relationship between geographic diversification and export performance. By employing panel trade data of 279 purely exporting firms over a six-years period (2010–2015), we found that both intra- and inter-regional diversification have an inverted U-shaped relationship with export performance, where moderate levels of diversification have positive effects on export performance, but higher levels may be counterproductive. Results also showed that related product diversification has a positive effect on firm export performance and a negative moderating effect on the relationship between inter-regional diversification and export performance. In the case of intra-regional diversification, we did not find any moderating effect from product diversification. By focusing on firms from the agricultural sector based in an emerging economy, this study offers practical implications for firm managers, trade organizations and private export associations, that may also be applicable to other export-based activities and emerging economies.     

Geographic scope,product diversification,and the corporate performance of Japanese firms

The study extends research on the geographic scope, product diversification, and performance relationship by exploring both the antecedents and consequences of geographic scope. In so doing, it addresses a fundamental criticism of the geographic scope–performance relationship; namely, that the observed positive relationship between geographic scope and performance is spurious because it is the possession of proprietary assets that is the foundation of superior performance, not expansion into international markets per se. We tested the research model with data on the corporate performance of 399 Japanese manufacturing firms. In the partial least squares analyses used to examine the study’s six main hypotheses, we demonstrate that geographic scope was positively associated with firm profitability, even when the competing effect of proprietary assets on firm performance was considered. Further, we find that performance was not related to the extent of product diversification, although investment levels in rent‐generating, proprietary assets were related to the extent of product diversification. Copyright © 1999 John Wiley & Sons, Ltd.     

Corporate governance in Taiwan: The nonmonotonic relationship between family ownership and dividend policy

This study considers an important aspect of corporate governance: the relationship between cash flow rights and dividend payout policy of listed family firms in Taiwan, an economy characterized by a predominance of family-controlled firms. Dividend payout levels are important because they are crucial to governing the firm and managing its investments. The empirical results show that at a low level of controlling families’ cash flow rights, the threat to lose control at any time makes controlling families claim more in dividends. This yields a positive relationship between dividend payout and the cash flow rights of controlling families at this level. Meanwhile, at a moderate level of controlling families’ cash flow rights, the entrenchment effect becomes more robust and creates a negative relationship with dividend payout. Finally, at the very highest level of controlling families’ cash flow rights, excessive firm-specific risk again helps to again create a positive relationship. This nonmonotonic relationship between controlling family cash flow rights and dividend payout also holds for financially mature firms that have a high earned to contributed capital mix.     

Foreign‐based competition and corporate diversification strategy

Since the mid‐1980s U.S. domestic firms have faced significant increases in foreign‐based (i.e., import) competition as reductions in barriers to international commerce have resulted in markets and industries becoming increasingly global. Despite the growing and widespread importance of foreign‐based competition, the influence that such competition may exert on corporate diversification strategy is a question largely overlooked in the strategic management literature. This paper examines the impact of foreign‐based competition in a firm's core business on both the level and nature of a firm's diversification strategy at the corporate level in a panel dataset of U.S. firms over the period 1985–94. Our findings provide the first evidence that increased foreign‐based competition is indeed a statistically significant factor explaining both the reduced business‐level diversity and the increased strategic focus of U.S. firms that has been widely perceived over the past two decades. Copyright © 2005 John Wiley & Sons, Ltd.